Financial Statements

Financial Statements

Financial statements are very crucial to understand the financial performance of the company. These are instrumental and fundamental to assess and make a detailed analysis of any company. Here in this article I am giving some insights about these which will help readers to understand them.

Balance Sheet

A balance sheet is a financial statement as on date that reports company’s assets, liabilities, equity or net worth of the company

Equation of Balance sheet:

Assets= Liabilities + Owner’s equity

Note: If liabilities are more than assets then owner’s equity will be in negative which indicates the company is suffering from poor financial health

Potential stakeholders of balance sheet:

  • Potential shareholders whether to invest or not in the company
  • Banks/ Lenders to assess the financial health of the company before processing any loans to companies
  • Regulatory authorities to scrutinize a company’s financial health

Financial Ratios

Important financial ratios calculated based on Balance Sheet:

  • Current Ratio
  • Quick Ratio
  • Debt-Equity Ratio

Profit and Loss Statement

A profit and Loss Statement or Income Statement or Statement of operations is a financial report that provides information on company’s revenues, expenses and profit/loss for a specified period

Potential stakeholders of balance sheet:

  • Potential shareholders whether to invest or not in the company
  • Banks/ Lenders to assess the financial health of the company before processing any loans to companies
  • Regulatory authorities to scrutinize a company’s financial health

Financial Ratios

Important financial ratios calculated based on Profit and Loss Statement:

  • EV/EBITDA
  • P/E Ratio
  • Price to Book Ratio
  • Return on Equity
  • Return on Assets

Cash Flow Statement

A cash flow statement is a financial statement that shows the movement of cash and its equivalents in and out of the company in an accounting period. It provides a picture on how the cash is coming in and how the cash is being spent.

Calculation of Cash flow:

Net cash flow: Total Cash Inflows – Total Cash Outflows

Sources of Cash flow

  • Operating Activities
  • Investing Activities
  • Financing Activities

Potential stakeholders of balance sheet:

  • Potential shareholders whether to invest or not in the company
  • Banks/ Lenders to assess the financial health of the company before processing any loans to companies
  • Regulatory authorities to scrutinize a company’s financial health

FAQs

What is EBITDA?

  • Earnings before Interest, Tax, Depreciation and Amortization (EBITDA), This level of profit is before charging Non cash expenses and tax to arrive at Free cash flow of the firm. Investors before investing in any company they look for EBITDA margins

2)   Who are stakeholders?

  • Stakeholders are those individuals and entities who have financial interests in the company it could be the management of company, employees of the company, shareholders of the company, lenders of the company etc.

3)    What are financial ratios?

  • Financial ratios are calculated to understand overall financial health of a company and its market position
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